Foreign Capital dominates in Osaka, now shifting target from retail to office properties
Foreign investors, who have been the driving force for Osaka real estate market, made a significant shift in their targets. Their preference for the retail sector has moved to Grade A office buildings, which expect a long-term rent growth due to its stock and supply shortage. Strong demand for office pushed a famous empty building, which has been unoccupied since its completion in 2010, into the market with the latest trend tenants.
Investment Concentrated in Retail until 2017
Retail sector was, without doubt, the star in the Osaka real estate market until 2017. According to JLL Japan Kansai Branch, 64% of the commercial real estate investment in Osaka city during 1H17 was concentrated in Minami area, where the retail facilities have aggregated. It accounted for 35% in 2H17. Shinsaibashi and Dotonbori locate in Minami area, the most popular place for inbound tourists.
Major transactions by foreign investors included Nakaza Cui-daore Building, Prime Square Shinsaibashi, Edge Shinsaibashi, Crista Grand Building and G Building Midosuji 02. Among the domestic capital transaction, Shinsaibashi Plaza Building was a large one that caught market attention. Foreign investors started focusing on Minami area retail properties from 2014 with the prospect for sales growth, then rent growth, led by inbound tourism boost. The number of tourists visiting Osaka in 2017 was 11.1 million, increasing significantly from 2.6 million in 2013. Shinsaibashi-Suji Shopping Street and Ebisubashi area in Minami thrived with inbound tourists, and the rent for ground level shops skyrocketed. Strength of the retail sector reflected in the official land value announced in January 2018, when the land value for retail center Minami area exceeded office area of Kita (Osaka & Umeda station area) for the first time since their survey started in 1970.
Office Investment Active since 2018
Constant retail investment by foreign investors reached a turning point in 2018, when no large acquisition were observed. On the other hand, they executed the profit-taking selling between 2017 and 2018. Most of the buyers of those properties were domestic capital. In April 2019, Croesus Shinsaibashi, Minami iconic property, was sold to domestic investor and marked a chapter end of Minami retail investment by cross-border investors. Such investors’ new target was Grade A office in Osaka, presenting significant upside in rent because of the tight market. Latest office investments by foreign investors include Edobori Center Building, Matsushita IMP Building, and Kitahama NEXU Building in 2018, and Takeda Midosuji Building in 2019. Transactions by domestic investors included Resona Senba Building and XYMAX Umeda Shinmichi Building in 2018.
New office supply has been subdued since the completion of Grand Front Osaka in 2013. New products shifted to residences, then to hotels. Also many existing office floors were converted to hotels to pursue higher revenue. Such movement compressed Osaka office floor inventory. While, the economic recovery in Greater Osaka expanded office demand. A chronic shortage of office inventory led a drastic decrease in vacancy and annual rent growth. According to JLL Japan Research, Osaka Grade A office vacancy for 1Q19 was 0.5%, with average rent at JPY 21,437 per month per tsubo, up 11.2% y-o-y. Such market caught attention of investors.
Midosuji Frontier Revived with Full Lease to WeWork
LaSalle Investment Management (LIM) acquired Midosuji Front Tower, which remained vacant since its completion in 2010, and changed its name to Midosuji Frontier. LIM announced its lease to WeWork, a US co-working space company as a sole lessee and opened on June 3rd.
WeWork entered the Osaka market with Namba SkyO, and Midosuji Frontier became their second location. The 20-story building has c.18,000sqm GFA. Market participants including real estate brokers expect the entry of WeWork to stimulate corporate relocation demand, which had been stagnant due to the shortage of rental office space. Co-working space that provides high quality services and facilities such as WeWork will give significant advantages to the tenants. Co-working does not require large outlay involved with general lease agreements such as interior fittings, deposits, and restoration expenses. Rent per sqm is deemed to be higher than the market average, but long-term advantage of reducing expenditure can be significant for tenants. Depending on the contract structure, the space can be registered as corporate headquarters.
However, quite a few building owners avoid to lease their building to co-working businesses as a single tenant, considering its exit risk. In addition, some believe that the WeWork business model, that appeals the lessee’s interactive community and networking, does not match with Japanese culture. But users range from individual entrepreneurs to satellite offices of major corporations and shows steady demand.
WeWork related property investment includes acquisition of WeWork Nogizaka (Minato-ku, Tokyo), WeWork as a single tenant, in December 2018 by Japan Private REIT; and acquisition of The Iceberg (Shibuya-ku, Tokyo) also WeWork as a single teant, by foreign core investor. Co-working space is expected to grow and provide various investment opportunities and should contribute to further activities in the Osaka real estate market.
With focus on Osaka Bay Area, where 2025 World Expo will take place and is expected to open first Integrated Resort in Japan, attention to Osaka real estate investment market continues. There are number of urban infrastructure projects, including Osaka Metro and railway extension or new line, which attract investors, not only the traditional CBD but new coming office area. This leads the geographical expansion of real estate investment in Osaka, offering more attractive investment opportunities than ever.